If you didn't know your service work owed gross receipts tax and your tax preparer never mentioned it, can you avoid the penalty and interest?

Plain-English summary

Cathleen Tomlinson was a special-education teacher for the Taos Municipal Schools who, in 1993, became a certified Academic Language Therapist and started her own practice privately tutoring and counseling children with learning disabilities, paid by the students' parents. A single mother and, in the Hearing Officer's words, well-educated but "not sophisticated about tax matters," she never imagined that private teaching was a taxable business — so she didn't report or pay gross receipts tax on her fees. Her preparer, H&R Block, filed federal Schedule C forms reporting her tutoring income as business income every year, but never told her about New Mexico gross receipts tax.

Through an information-sharing agreement with the IRS, the Department found the unreported receipts and issued five assessments (gross receipts tax, penalty, and interest) for 1993–1995. Ms. Tomlinson paid the tax and protested only the penalty and interest, citing financial hardship and her view that taxing special-needs education is unfair.

The Hearing Officer was sympathetic but denied the protest:

• Interest is mandatory. Section 7-1-67 says interest "shall" be paid on tax not paid when due. It's not a punishment — it compensates the state for the time value of revenue it should have had — so why the tax was late doesn't matter. Because Ms. Tomlinson didn't pay when due, interest had to stand.
• Not knowing about the tax is negligence. The § 7-1-69(A) penalty applies to a failure to pay "due to negligence." New Mexico's self-reporting system charges every person with a duty to find out the tax consequences of their actions (Tiffany Construction), and an "erroneous belief" that no tax applied fits the negligence definition in Regulation 3 NMAC 1.11.10.
• Relying on H&R Block didn't save her. The non-negligence example in Regulation 3 NMAC 1.11.11 protects a taxpayer who got erroneous advice from competent tax counsel or accountant after full disclosure. Ms. Tomlinson failed it on two counts: she never actually asked H&R Block about gross receipts tax, and H&R Block "holds itself out as an income tax preparation service," not a tax attorney or accountant. The Hearing Officer sharply criticized H&R Block for not flagging the gross receipts tax when it saw a Schedule C with no such expense — but that didn't change the legal result.

The tax itself was not disputed, and there's no statutory exemption for these educational services; relief on that, the Hearing Officer noted, would have to come from the Legislature.

What this means for you

Service providers who think they aren't "in business"

If you're paid by clients for services — tutoring, counseling, consulting, freelance work — New Mexico almost certainly treats you as engaging in business and owing gross receipts tax, even if it never felt like "starting a business." Income tax is not the only tax that applies. The moment you begin taking money for services, check with the Department (or a real tax professional) about gross receipts tax; assuming it doesn't apply is exactly the "erroneous belief" the state calls negligence.

Anyone relying on a tax-return preparer

Relying on a preparer only protects you if you (1) actually asked about the specific tax, (2) fully disclosed the facts, and (3) got advice from competent tax counsel or an accountant. A return-preparation service that never gave you advice on the tax at issue — and isn't an attorney or accountant — won't shield you from a negligence penalty. If gross receipts tax could apply to you, ask the question directly and keep a record of the answer.

Accountants and tax professionals

This decision draws a firm line under Regulation 3 NMAC 1.11.11: the reasonable-reliance defense requires erroneous advice from competent counsel/accountant after full disclosure, and silence from a return preparer who was never asked doesn't qualify. It's also a pointed reminder that a client filing a Schedule C with no gross receipts tax expense is a red flag worth raising unprompted — the Hearing Officer criticized the preparer for missing it, even while holding the taxpayer liable.

Common questions

Q: I didn't know tutoring was a taxable business — isn't the penalty unfair?
A: The negligence penalty is designed for exactly this kind of honest mistake. New Mexico is a self-reporting system, and taxpayers are charged with the duty to learn whether their activities are taxable. An "erroneous belief" that no tax applied meets the definition of negligence.

Q: My preparer never told me I owed gross receipts tax — doesn't that get me off the hook?
A: Not here. The reliance defense protects a taxpayer who received erroneous advice from competent tax counsel or an accountant after fully disclosing the facts. Ms. Tomlinson never asked H&R Block about gross receipts tax, and H&R Block was a return preparer, not a tax attorney or accountant — so the defense failed.

Q: Why do I owe interest if the underpayment was an innocent mistake?
A: Interest is mandatory under § 7-1-67 and compensates the state for revenue it received late. It isn't a punishment, so the reason for the late payment — even a completely innocent one — doesn't excuse it.

Q: Does this decision apply to my situation?
A: Not directly. A Decision and Order resolves one taxpayer's protest on its specific facts and the law in effect at the time. It illustrates how New Mexico treats penalty, interest, and the reliance-on-advisor defense, but your facts may differ.

Citations and references

Statutes and regulations:

• § 7-1-67(A) NMSA 1978 — interest on tax not paid when due is mandatory ("shall")
• § 7-1-69(A) NMSA 1978 — 2% per month penalty (max 10%) for failure to pay due to negligence
• Regulation 3 NMAC 1.11.10 (formerly TA 69:3) — defines negligence, including "erroneous belief"
• Regulation 3 NMAC 1.11.11 (formerly TA 69:4) — non-negligence examples; the fourth protects reasonable reliance on the advice of competent tax counsel or accountant after full disclosure
• § 7-1-24 NMSA 1978 — protest procedure; jurisdiction

Case law cited:

• State v. Lujan, 90 N.M. 103, 560 P.2d 167 (1977) — "shall" makes the interest assessment mandatory
• Tiffany Construction Co. v. Bureau of Revenue, 90 N.M. 16, 558 P.2d 1155 (Ct. App. 1976), cert. denied, 90 N.M. 255, 561 P.2d 1348 (1977) — every person has a duty to ascertain the tax consequences of their actions; failure to do so is negligence

Source

• Listing: New Mexico Decisions & Orders
• Decision post: Cathleen Tomlinson
• Decision PDF: D&O 98-13

Original ruling text

BEFORE THE HEARING OFFICER
OF THE TAXATION AND REVENUE DEPARTMENT
OF THE STATE OF NEW MEXICO

IN THE MATTER OF THE PROTEST OF
CATHLEEN TOMLINSON, NO. 98-13
ID. NO. 02-315014-00 9, PROTEST TO
ASSESSMENT NOS. 2045130, 2056017,
2056018, 2056019 AND 2056020

DECISION AND ORDER

This matter came on for formal hearing before Gerald B. Richardson, Hearing Officer, on

March 9, 1998. Cathleen Tomlinson, hereinafter, “Taxpayer”, or “Ms. Tomlinson” represented

herself at the hearing. The Taxation and Revenue Department, hereinafter, “Department”, was

represented by Mónica M. Ontiveros, Special Assistant Attorney General. Based upon the

evidence and arguments presented, IT IS DECIDED AND ORDERED AS FOLLOWS:

FINDINGS OF FACT

1. Commencing in 1993, the Taxpayer began providing private counseling and

tutoring of children with learning disabilities or behavioral disorders who were enrolled in the

Taos Municipal Schools. The Taxpayer received compensation for providing these services from

the parents of the students she tutored or counseled.

2. Prior to providing private counseling and tutoring, the Taxpayer had been

employed by the Taos Municipal Schools as a special education teacher.

3. Because it never occurred to the Taxpayer that she was “in business”, or engaging

in business as a private counselor or tutor, she did not understand that she was required to report

and pay gross receipts tax upon her receipts from providing counseling or tutoring services.
Consequently, she did not report or pay gross receipts tax upon her receipts from providing those

services.

4. The Taxpayer engaged H&R Block to prepare her income tax returns during all

relevant periods. H&R Block prepared Federal Schedule C forms for the 1993 and subsequent

tax years, reporting the Taxpayer’s receipts from tutoring and counseling as income from a

business or profession for federal income tax purposes.

5. The Taxpayer never asked H&R Block whether any taxes other than state and

federal income taxes applied to her receipts from tutoring and counseling, and H&R Block never

informed the Taxpayer that she was liable for New Mexico gross receipts tax upon her receipts

from tutoring and counseling.

6. Pursuant to an information sharing agreement with the Internal Revenue Service,

the Department receives information with respect to New Mexico taxpayers.

7. As a result of information received from the Internal Revenue Service, the

Department issued various assessments to the Taxpayer, assessing gross receipts tax, penalty and

interest on the Taxpayer’s receipts from performing tutoring and counseling services. Those

assessments are as follows:

Assmt. No. Date Reporting Paid Tax Penalty Interest
2045130 6-14-96 7/93-12/93 $813.04 $81.30 $294.73
2056020 7-12-96 1/94-6/94 $453.30 $45.33 $135.99
2056019 7-12-96 7/94-12/94 $453.37 $45.34 $102.01
2056018 7-12-96 1/95-6/95 $510.26 $51.03 $76.54
2056017 7-12-96 7/95-12/95 $471.49 $47.15 $35.36

8. The Department granted the Taxpayer a retroactive extension of time in which to

file a protest to Assessment No. 2045130.

9. On August 12, 1996, the Taxpayer filed timely, written protests to the

Department’s assessments referenced above.

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DISCUSSION

The Taxpayer does not dispute that she is liable for gross receipts tax upon her receipts

from performing counseling and tutoring services for parents of children with special needs who

are enrolled in the Taos Municipal Schools. The Taxpayer has paid the tax portion of the

assessments in protest and has protested only the assessment of penalty and interest.

The Taxpayer disputes the imposition of penalty and interest primarily because of the

hardship it would cause to pay it and because of her belief that the imposition of the tax itself,

under the circumstances of her work, is inequitable.

Ms. Tomlinson is a single mother with two children, who, although well-educated, is not

sophisticated about tax matters. She had worked as an employee of the Taos Municipal Schools

prior to 1993 as a special education teacher. In 1993, she obtained another credential as a

certified Academic Language Therapist and instead of working as an employee of the Taos

Municipal Schools, the schools referred students with special needs to her for individual tutoring

and counseling and she began her private counseling and tutoring business. The Taos Municipal

Schools continued to make the school premises available to her to meet with her student clients

for the convenience of the students. It simply never occurred to Ms. Tomlinson that private

teaching was a taxable business and that in addition to income taxes, that there might be other

taxes applicable to her receipts from performing her work. Because of this perception, Ms.

Tomlinson did not inquire of the Department about any tax consequences to her change in the

way she was teaching. Additionally, Ms. Tomlinson, not being sophisticated about tax matters,

had relied upon her income tax preparer, H&R Block, to prepare her taxes and to advise her

about tax matters. H&R Block had prepared Federal Schedule C forms for inclusion with her

federal return for the tax years at issue, so clearly they knew she was doing business as a private
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tutor, but they never informed her about New Mexico’s gross receipts taxes and never inquired of

her why she had no deductions from income for such taxes.

Ms. Tomlinson also objects to the tax itself as inequitable because the cost of the tax falls

upon the parents of her clients, many of who are low income and many of whom already pay

taxes to support our public schools. She does not think that the provision educational services

such as those she provides should be subject to tax. Ms. Tomlinson understands, however, that

there is no statutory exemption or exception for the types of educational services she provides

and that she will need to look to the legislature for relief from the inequity of the imposition of

this tax, itself. Nonetheless, she hopes that this will also be taken into consideration in this

matter in the hope that the totality of the circumstances of this case will be cause for leniency

with regard to the imposition of penalty and interest in this matter.

While I have great respect for Ms. Tomlinson and the work that she does and I have no

doubt that she has made a real difference in the lives of the children who she has helped,

nonetheless, I must be guided by the statutes and the interpretation of those statutes given by our

courts in determining the legal issues presented.

Section 7-1-67(A) NMSA 1978 addresses the imposition of interest on tax deficiencies and

provides as follows:

A. If any tax imposed is not paid on or before the day on which it
becomes due, interest shall be paid to the state on such amount from
the first day following the day on which the tax becomes due,
without regard to any extension of time or installment agreement,
until it is paid. (emphasis added)
It is a well settled rule of statutory construction that the use of the word "shall" in a statute indicates

that the provisions are intended to be mandatory rather than discretionary, unless a contrary

legislative intent is clearly demonstrated. State v. Lujan, 90 N.M. 103, 560 P.2d 167 (1977).

Applying this rule to Section 7-1-67, the statute requires that interest be paid to the state any time

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that taxes are not paid when they are due and no exceptions to the imposition of interest are

countenanced by the statute. Thus, it doesn't matter why taxes were unpaid. Interest is imposed for

the period of time that they are unpaid.

There is an aspect of Ms. Tomlinson’s argument which conceives of interest as a penalty

imposed to punish a taxpayer for the late payment of taxes. This argument misapprehends the

nature of the assessment of interest. Interest is imposed to compensate the state for the lost value of

having tax revenues at the time they are required to be paid. Those tax revenues could have been

invested by the state and interest earned upon those revenues, until the state needed to use the

money to meet its obligations. Unfortunately, the rate of interest chosen by the Legislature, being at

this time a fair amount more than market rates of interest, does little to dispel the Taxpayer’s

conception that the imposition of interest is intended to punish the late payment of tax.

Nonetheless, while one may disagree with the rate of interest set by statute, that is a matter within

the sound discretion of the Legislature, and the Department is without authority to substitute its

own judgment for that of the Legislature in setting the rate of interest to be imposed. In this case,

because there is no dispute that Ms. Tomlinson did not pay gross receipts taxes at the time they

were originally due, the assessment of interest must stand.

The imposition of penalty is governed by the provisions of NMSA 1978, Section 7-1-
69(A)(1995 Repl. Pamp.), which imposes a penalty of two percent per month, up to a maximum of
ten percent:
In the case of failure, due to negligence or disregard of rules and regulations, but
without intent to defraud, to pay when due any amount of tax required to be paid or
to file by the date required a return regardless of whether any tax is due,....

This statute imposes penalty based upon negligence (as opposed to a willful or fraudulent intent) for

failure to timely pay tax. Thus, there is no contention that the failure to report and pay taxes was

based upon any conscious attempt by Ms. Tomlinson to underreport taxes. In fact, I have no doubt

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that she would have reported and paid these taxes at the time they were due, had she known of her

responsibility for them. What remains to be determined, however, is whether Ms. Tomlinson was

negligent in failing to report her taxes properly. Taxpayer "negligence" for purposes of assessing

penalty is defined in Regulation 3 NMAC 1.11.10 (formerly TA 69:3) as:

1) failure to exercise that degree of ordinary business care and prudence which
reasonable taxpayers would exercise under like circumstances;
2) inaction by taxpayers where action is required;
3) inadvertence, indifference, thoughtlessness, carelessness, erroneous belief or
inattention.

In this case the Taxpayer's failure to report and pay taxes was based upon Ms. Tomlinson’s

lack of knowledge about New Mexico gross receipts taxes. New Mexico has a self-reporting tax

system which requires that taxpayers voluntarily report and pay their tax liabilities to the state.

Because of this, the case law is well settled that every person is charged with the reasonable duty to

ascertain the possible tax consequences of his actions, and the failure to do so has been held to

amount to negligence for purposes of the imposition of penalty pursuant to Section 7-1-69 NMSA

1978. Tiffany Construction Co. v. Bureau of Revenue, 90 N.M. 16, 558 P.2d 1155 (Ct. App.

1976), cert. denied, 90 N.M. 255, 561 P.2d 1348 (1977).

The fact that Ms. Tomlinson relied upon H&R Block to advise her about tax matters is a

circumstance which should be considered in determining whether she was negligent in failing to

pay taxes in a timely manner. Regulation 3 NMAC 1.11.11 (formerly regulation TA 69:4) provides

a listing of situations which may indicate that a taxpayer was not negligent. Pertinent to Ms.

Tomlinson’s reliance on H&R Block is the fourth example, which provides in pertinent part:

the taxpayer proves that the failure to pay tax or to file a return was
caused by reasonable reliance on the advice of competent tax
counsel or accountant as to the taxpayer’s liability after full
disclosure of all relevant facts;....(emphasis added).

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In this case, there are several ways in which Ms. Tomlinson fails to qualify under this regulation.

Primarily, it is because Ms. Tomlinson was never advised by H&R Block about her gross receipts

taxes. The regulation is intended to protect taxpayers who sought advice and were given erroneous

advice by their tax advisors. Ms. Tomlinson admitted that she never inquired of them about any

taxes other than the income taxes for which they prepared returns, and she admitted that she was

never advised whatsoever about the New Mexico gross receipts taxes which applied to her.

Admittedly, this is a bit of a catch-22, because Ms. Tomlinson did not know to ask about gross

receipts taxes, and she had fully disclosed her income and its source in order for them to prepare her

income taxes. It must also be conceded that, H&R Block does its clients a great disservice when it

fails to advise them about New Mexico’s gross receipts tax when its clients file a Federal Schedule

C to report business income and losses and they find no evidence of an expense for payment of

such taxes. It is a situation which, unfortunately, I have encountered all too often. Nonetheless, one

must also consider that H&R Block holds itself out as an income tax preparation service and not a

full scale tax adviser. That fact also ties into the language in the Department’s regulation which

requires that the advice be given by a “competent tax counsel or accountant”. H&R Block is

neither. They are income tax preparers, but they are not tax attorneys or accountants1. Because of

the foregoing, Ms. Tomlinson does not meet the criteria of Regulation 3 NMAC 1.11.11.

Additionally, the facts of this case fall under the category of “erroneous belief” in Regulation 3

NMAC 1.11.10 defining taxpayer negligence and Ms. Tomlinson was also negligent under the

standards of the Tiffany Construction Company case, supra., and for these reasons, the imposition

of penalty is upheld.

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Based upon this and other matters which have come before me, I also have substantial reason to question the
competency of H&R Block, but that is not relied upon as a grounds for finding the pertinent regulation inapplicable
in this case.
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Although the imposition of penalty will pose a hardship for Ms. Tomlinson in this case, I

hope that she can recognize the sound policy reasons behind the imposition of penalty. A self-

reporting tax system relies upon taxpayers accurately reporting their tax liabilities to the

government. There are insufficient government resources to audit every taxpayer periodically to

otherwise assure tax compliance. The imposition of penalty provides taxpayers with an incentive to

make inquiry so as to understand the tax consequences of their actions to ensure the accurate and

timely payment of taxes.

CONCLUSIONS OF LAW

1. The Taxpayer filed timely, written protests to Assessment Nos. 2045130, and

2056017 through 2056020 and jurisdiction lies over both the parties and the subject matter of this

protest.

2. Because the Taxpayer did not pay tax when it was due, interest was properly

assessed.

3. The Taxpayer was negligent in failing to timely report and pay gross receipts taxes,

and penalty was properly assessed.

For the foregoing reasons, the Taxpayer’s protest IS HEREBY DENIED.

DONE, this 11th day of March, 1998.

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